Natural gas prices fueling crop costs

Heath Key has been watching natural gas prices make a steady climb throughout the winter. But while the rise concerned him, he didn't think there would be a major impact on agriculture. Key changed his tune in early February.

“That's when we saw sharp, rapid price increases for a number of reasons — war with Iraq, colder weather that was increasing usage and other things,” says Key, senior market advisor with OSA Crop Marketing in Union City, Tenn. “Within the last few days the spot market showed a spike of natural gas futures to a bit over $10 per million Btu. This is a big deal because the timing is really bad. This is just prior to spring planting and USDA doing its survey on planting intentions.”

To put the natural gas price rise in perspective, Key says it would be like “corn going from $2 to $8.”

Key suspects that natural gas prices “will top out (or may already have) shortly as the war comes to fruition and winter winds down. This doesn't, however, mean an immediate return to sub-$3 natural gas. In fact, the other spike in 2000-2001 took about eight months to return to normal prices. This suggests corn drying costs and fuel for irrigation rigs still will be two to four times higher than last year.”

And since natural gas is the main component of anhydrous ammonia, prices for the fertilizer are likely to be exceptionally high, Key says. While much was produced when gas was $3.50 to $5 per million Btu, that's still nearly double last year's costs.

While Key won't comment on reports that some Southern fertilizer production plants have closed because natural gas prices make their products cost-prohibitive, he does say it wouldn't surprise him if that were the case.

What does this do to crops other than corn?

“Well, this could affect cotton too. Like corn, cotton is a nitrogen- and fuel-intensive crop. Rice is also a fuel-intensive crop in drying costs. That could mean more soybeans, which use less fuel and nitrogen.”

Any producer who plants corn should also remember the possibility of being financially hammered when harvest begins and there's drying to be done.

“In a lot of places in the western plains and Midwest, natural gas is used to run irrigation rigs. Most of the time that's cost effective. But with natural gas prices so high and water levels low, producers could move away from corn. In Nebraska, South Dakota and parts of Kansas, producers have upped corn acreage significantly over the last few years. But they may move back to soybeans.”

In general, what is Key suggesting to his clients? Does he see corn-planting intentions changing?

“In the traditional Midwest area, most producers are looking at a 50/50 rotation of corn and soybeans. I don't see those producers changing too much.”

Key says the areas where there will be swings are from Texas up to North Dakota, the Mid-South and Southeast where there are other crops available to farmers.

“I don't know how to quantify how big the swing could be. Many producers haven't really started pricing fertilizer yet.”

Is the market paying attention to these possibilities yet?

“Other analysts have been saying some of the same things I am. The market has yet to take on what the impact will be because it's still in a winter trading pattern. That should now change when the market transitions to the crop that's being planted.”

The next thing producers should pay attention to is the USDA's planting intentions report, says Key.

“There have been trade estimates out early. In January, there were reports that there would be an 81 million- to 82 million-acre corn crop. We think that's 1.5 million to 2.5 million acres too high. With the worst-case scenario — continued super-high fertilizer prices along with weather trouble — we could drop back to 78.5 million acres.”

Based on the old crop stock situation, Key believes corn has been somewhat undervalued. Importers around the world have been fairly laid back about the stock situation.

“We tend to think that taking 1 million or 2 million acres out of the new crop will put a lot of pressure on the acres that are planted to perform well. Any problems that arise during the growing season will likely make the market very volatile.”